Who Wants to Extend the Debt Ceiling? Members Who Stand to Lose Money in the Market

Does exposure to the stock market in legislators’ personal investment portfolios affect their vote choices? Do personal financial interests matter as much or more than the typical predictors of legislative decision-making such as party and constituency? I argue that legislator self-interest predicts more than just reelection-seeking behavior. Self-interest also suggests that legislators seek to maintain and protect their equity investments. I theorize that risk-averse legislators who have significant exposure to the stock market will make policy choices in order to avert market crashes and thus limit personal financial losses, and that legislators with little exposure to the market or who are risk accepting will not. Original data on the financial assets of members of Congress are collected and a novel measure of legislators’ revealed risk profiles is introduced. The empirical test is an examination of the eleventh-hour August 2011 U.S. House roll call to raise the U.S. debt limit. The findings show that risk-averse members of Congress with more money invested in the stock market were more likely to vote to increase the debt limit, presumably in order to avoid a market crash.

From a new working paper by Christian Grose. The effects of equity investments on this roll call vote are not small:

If a legislator had $30,000 in stock investments and $30,000 in a retirement account, then there was a 59.8 percent chance of voting to extend the debt limit. If a legislator had $500,000 in stocks and $500,000 in retirement accounts, then there was a 66.4 percent chance of voting to extend the debt limit. If the legislator had $1.5 million in stocks and $1.5 million in retirement accounts, which is in the higher stratum of financial holdings, then there was a 78.3 percent likelihood of voting to increase the debt ceiling.

4 Responses to Who Wants to Extend the Debt Ceiling? Members Who Stand to Lose Money in the Market

This is correlation, not necessarily causation. The members with more investments are generally more financially sophisticated/experienced, and they understand what the debt limit is/is not.

Also, the vote used in this study was the vote on the Budget Control Act, the legislation that was the end result of the debt limit standoff in 2011. This bill had eight separate provisions that could have swayed members’ votes, notably one requiring the House and Senate to vote on a Balanced Budget Amendment to the Constitution. We can’t just ignore those other seven provisions and pretend that votes on this bill were determined only by the debt limit and members’ personal investments. In total the bill cut spending by $2.1 trillion, another huge issue that this study overlooks (source: http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/123xx/doc12357/budgetcontrolactaug1.pdf)

Or it may simply be that Democratic legislators skew wealthy to a greater degree than do Republican legislators, and the former are less likely to oppose a debt ceiling increase for ideological reasons or because of the prevailing opinion among their constituencies.

Have to agree with Anon8 here. Christian presumes members voting their financial self-interest without considering whether those with larger investment portfolios may simply be more aware of the negative impact a failure to extend the debt ceiling may have on the overall market. We need a measure of “economic wisdom” independent of stock market investment. (Also, why compare in Table 3 MCs to “all Americans,” why not compare to Americans of similar economic means to MCs?)

Does the risk aversion finding imply “economic wisdom” per Paul G.’s point? I am not so sure.

On p. 26 the author states: “The results regarding legislator exposure to the market and increased willingness to cast a roll call for the debt limit are interesting, and I have interpreted it to show that legislators’ personal financial interests can shape congressional decisions. However, one might argue that information – and not direct self-interest – is the driver of these findings. It is possible that those members with substantial equity investments are not voting for the debt limit because they fear their own financial losses, but because their stock ownership levels makes them more knowledgeable regarding the national and global economic consequences of not passing a debt limit increase. While this alternative interpretation is possible, the evidence regarding legislators’ risk profiles suggests otherwise. The effect of significant market holdings on the roll-call vote was conditioned by the risk aversion of the members. Because risk aversion had a conditional impact along with stock investments, this is not simply a story of financial literacy. Members with the most to lose who also are averse to losing protected their own financial interests with their roll call.”

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